6 Jun

Campbell Soup Stock: Why Upside Seems Limited


Campbell Soup

Campbell Soup (CPB) stock rose ~10% on June 5 following its stronger-than-expected third-quarter results. The company beat analysts’ estimates on the sales and earnings front. Campbell Soup’s base business showed a sequential improvement, which is positive.

Campbell Soup’s top line benefited from the Snyder’s-Lance acquisition. The organic sales trend improved during the third quarter compared to the first half of fiscal 2019. The negative mix and input cost inflation continued to drag Campbell Soup’s gross margins down. The adjusted gross margin fell on a YoY (year-over-year) basis. However, the gross margin marked a stark sequential improvement from a decline by 460 basis points in the first half of the year.

Campbell Soup Stock: Why Upside Seems Limited

Campbell Soup’s bottom line stayed low. Lower margins and higher interest expenses continue to hurt. However, the adjusted EPS beat analysts’ estimate. The third quarter is the sixth consecutive quarter that Campbell Soup beat analysts’ EPS estimate—an encouraging sign.

Campbell Soup’s focus on pricing, innovation, and marketing will likely support its organic sales growth in the coming quarter. Divesting underperforming brands and productivity and cost-savings are expected to support the bottom line.

What’s in the offing?

We’re impressed with Campbell Soup back-to-back healthy financial performance. The sequential improvement in organic sales is positive. The company’s management raised the adjusted earnings outlook due to its improved operating performance and lower interest costs.

Campbell Soup stock has risen 27.1% on a YTD (year-to-date) basis as of June 5, which implies that the positives are priced in the stock. Going forward, the upside seems limited due to the projected deceleration in the sales growth rate. The company annualized its Snyder’s-Lance acquisition. We would like to see a material improvement in the base business, which could be hard to achieve in the near term. The company’s valuation isn’t attractive due to the projected low-single-digit increase in its fiscal 2020 EPS.

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